Global Bank Rescue Aims to Halt Crisis Markets Up

By Reuters -  |  Posted 2008-10-13

NEW YORK (Reuters) - The world bet solidly on recapitalizing ailing banks as the fastest way out of the financial crisis, sending stock markets higher after their worst week in history.

Britain, Germany, France and other European countries announced multibillion-dollar plans to guarantee banks and take equity stakes, while U.S. officials said they were finalizing a similar plan.

U.S. stocks rose 7 percent, reversing direction after the Dow Jones industrial average fell 18 percent last week in a climate of panic and uncertainty as credit markets froze and major economies headed toward recession.

European stocks closed 10 percent higher.

"Sometime last week it seemed like we faced Armageddon, so to have a coordinated plan on stabilizing banks is huge progress," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Wall Street also focused on investment bank Morgan Stanley , which reached a financing deal with Mitsubishi UFJ Financial Group Inc (MUFG), possibly with U.S. government support. Morgan shares soared more than 80 percent, after losing 58 percent last week.

In addition, the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would lend commercial banks as much U.S. dollar liquidity they needed.

That had an instant impact on bank-to-bank lending rates, which eased, but there was still no clear evidence of funds cascading from banks to companies.

U.S. bond markets were closed for the Columbus Day holiday.

The euro and sterling gained strength on the European plans.

Oil rose more than $3 to $81 a barrel.

U.S. Treasury Secretary Henry Paulson was meeting with top Wall Street bankers on Monday in a scramble to finalize a plan to buy bank shares, an about-face from a previous focus on buying bad debt from banks.

British Prime Minister Gordon Brown shifted the world's thinking by proposing to inject new capital into banks to get them lending again.

The United States has since moved closer to the positions of European leaders, who were in Washington over the weekend for meetings of the Group of Seven major economies, the International Monetary Fund and the World Bank.


Brown also called on world leaders to create a new financial architecture to update the current international economic system, which was set up at a conference in Bretton Woods, New Hampshire, in 1944.

"Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed," Brown said in a speech at the London offices of Thomson Reuters.

Britain's bank plan called for 37 billion pounds ($64 billion) of taxpayers' cash to bail out three major banks in a move that would likely make the government their main shareholder.

Germany, France, Italy and other European governments also announced rescue packages totaling hundreds of billions of dollars that were designed to combat the banking crisis, the worst since the Great Depression.

Iceland -- forced over the past week to take over three big banks, shut down its stock market and abandon attempts to defend its currency -- officially requested financing from the International Monetary Fund, an IMF official said.

The developments also calmed Princeton University economist Paul Krugman, who was named as the winner of the Nobel prize in economics on Monday.

"I'm slightly less terrified today than I was on Friday," Krugman said. "We're going to have a recession and perhaps a prolonged one but perhaps not a collapse."

Japan said on Monday it was considering whether to guarantee all bank deposits, while the central bank said it might join further global efforts to boost dollar funding to strained money markets.

The two men vying to succeed U.S. President George W. Bush after the November 4 election were formulating their own plans.

Democrat Barack Obama, leading in public opinion polls, proposed a 90-day moratorium on home foreclosures and other measures aimed at creating jobs.

Republican John McCain was also considering rolling out a new economic package.

($1=.5786 Pound)

($1=.7287 Euro)

(Reporting by Reuters bureaus around the world; Additional writing by Eddie Evans; Editing by Gary Hill)